Parker-Hannifin Corporation — FY2021 Form 10-K
Period note: The supplied filing is the annual report for the fiscal year ended June 30, 2021, not a 2020 Q4 filing. Comparisons below are primarily with FY2020; prior-year figures reflect the company’s retrospective inventory-accounting change from LIFO to FIFO.
Business context and reporting period
Parker manufactures motion- and control technologies for industrial, mobile and aerospace markets. FY2021 net sales were $14.35 billion: Diversified Industrial contributed 83% and Aerospace Systems 17%. No customer represented more than 3% of sales.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $14.35 billion | $13.70 billion |
| Gross margin | 27.2% | 24.8% |
| Net income attributable to common shareholders | $1.746 billion | $1.202 billion |
| Diluted EPS | $13.35 | $9.26 |
| Operating cash flow | $2.575 billion | $2.071 billion |
| Capital expenditures | $210 million | $233 million |
Revenue increased 4.8% and attributable net income increased 45.3%. Management attributed the sales increase to stronger Diversified Industrial volume, partly offset by lower Aerospace Systems volume. The gross-margin improvement reflected stronger margins across businesses, lower costs, and the absence of $69 million in 2020 acquisition-related cost-of-sales expenses. SG&A fell 8%, including lower discretionary spending and the absence of $119 million in 2020 acquisition-related expenses. FY2021 also included a $109 million gain on asset disposals, primarily a $101 million land sale.
Operating cash flow less capital expenditures was approximately $2.37 billion, calculated from reported figures. Cash and cash equivalents plus marketable securities and other investments totaled $772 million at year-end. Working capital was $2.52 billion and the current ratio was 1.8.
Long-term debt was $6.58 billion, with $2.8 million payable within one year; the company reported no commercial paper outstanding at year-end. Debt-to-debt-plus-equity was 0.44, below the 0.65 covenant limit. The $2.5 billion revolving credit facility was fully available. Cash dividends paid were $475 million.
Segment trends and material changes
- Diversified Industrial: Sales rose 9.1% to $11.96 billion; excluding acquisitions and currency, sales increased 3.9%. North American and International operating margins improved to 18.7% each, from 15.3% and 15.0%. Segment backlog increased to $3.24 billion from $2.12 billion.
- Aerospace Systems: Sales declined 12.7% to $2.39 billion and operating margin fell to 16.9% from 17.4%, reflecting weaker commercial OEM and aftermarket demand amid COVID-19. Backlog rose to $3.26 billion from $3.02 billion, primarily on military OEM orders.
- Company backlog: $6.50 billion, versus $5.1 billion at June 30, 2020; approximately 84% was scheduled for delivery within 12 months.
- FY2021 operating cash flow improved by $504 million. Investing cash flow was nearly neutral, compared with $5.02 billion of net use in FY2020, which included major acquisitions. Financing cash outflow was $2.62 billion, including term-loan and commercial-paper repayments.
- The company made no acquisitions in FY2021. Lord and Exotic acquisitions completed in 2019 contributed to the prior-year comparison and integration costs.
Outlook, risks, contingencies and unusual items
- No consolidated earnings or revenue guidance is provided in the supplied filing text. Management expected FY2022 restructuring-related savings to lift Diversified Industrial operating income by approximately 1% in each of its North American and International operations, and Aerospace Systems operating income by approximately 2%. About $40 million of FY2022 realignment and integration charges were expected in Diversified Industrial; significant additional Aerospace charges were not then anticipated.
- COVID-19 continued to weigh on aerospace demand and posed risks to customer demand, facilities, supply chains and operations. Management stated the pandemic’s duration and ultimate financial impact could not be reliably estimated and could be material.
- On August 2, 2021, after fiscal year-end, Parker announced a recommended cash acquisition of Meggitt for approximately £6.31 billion. Completion remained subject to shareholder and regulatory approvals. Parker intended to use cash and new debt and had arranged a £6.524 billion bridge facility as a backstop; financing, integration, execution and increased aerospace exposure are key risks.
- Environmental remediation accruals were $17.1 million; estimated total exposure ranged from $17.1 million to $73.5 million. Management did not expect pending litigation and other proceedings to materially affect liquidity, financial condition or results, but outcomes remain uncertain.
- Defined-benefit pension obligations and expense depend on investment returns and actuarial assumptions. The filing identifies $707 million of domestic pension actuarial losses subject to future amortization. The company expected approximately $102 million of pension contributions in FY2022.
- Other principal risks include economic and industrial cyclicality, raw-material cost and availability, foreign-exchange exposure, cybersecurity, competition, acquisition integration, debt and covenant capacity, tax matters, environmental regulation and product liability.
Important facts for investors to verify
- Confirm the period: this is FY2021, not 2020 Q4, and FY2020/FY2019 comparatives were retrospectively adjusted for the LIFO-to-FIFO accounting change.
- Assess the persistence of margin and cash-flow gains, including the effects of cost reductions, lower discretionary spending and the one-time land-sale gain.
- Track commercial aerospace recovery, segment backlog conversion, and whether backlog translates into shipments and revenue as scheduled.
- Review Meggitt transaction approvals, final financing structure, incremental debt, integration assumptions and expected synergies.
- Monitor pension assumptions and contributions, environmental exposure, and compliance with debt covenants as financing needs evolve.